Southern Union Eyes Growth Opportunities After Panhandle Purchase

Southern Union's purchase of Panhandle Energy from CMS Energy was a steal that will lead to a significant increase in earnings and cash flow for Southern this year and in the upcoming years, Southern Union President Thomas F. Karam said in an interview with NGI.

In November 1998, CMS pledged $2.2 billion for the properties, which Duke had bought as part of PanEnergy less than two years earlier for $7.7 billion. The CMS price included a cash payment of $1.9 billion and existing Panhandle debt of $300 million.

Southern Union paid $584.3 million in cash plus three million in common stock (currently worth about $49 million). It also assumed $1.159 billion of debt. For that much smaller price, it got Panhandle Eastern Pipe Line, Trunkline Gas pipeline, Sea Robin Pipeline, Trunkline LNG and Southwest Gas Storage.

Opportunities like that, Karam said, don't come around very often, and aren't likely to pop up again anytime soon, but Southern Union plans to keep a close eye on the market.

"It seems to me that the wave of distressed sales have subsided a little bit and many companies have some breathing room," he said. "I don't know what the next couple years will bring. The stronger we are, the better we will be to take advantage of opportunities if they do present themselves."

He noted that the sale of Panhandle came about as a result of the industry turmoil created by Enron's collapse and the subsequent demise of the energy trading business. CMS was hard up for cash and was basically forced to sell the assets it had purchased a short four years earlier.

"These pipeline assets really don't come on the market all that often and are by any stretch the premier assets in the sector," Karam said. "We acquired them at a price that is immediately accretive to us. We are financing it in a manner that will within the next 12-18 months strengthen our balance sheet, dramatically improve our cash flow, increase in the first year our earnings by 35-50%, and doing it all while Southern Union will be almost entirely a regulated natural gas transporter. That to me is strategically simple. And in our environment right now, that is a pretty good story."

Southern Union financed the acquisition with $420 million in cash from the sale in January of its Texas operations, $125 million of the net proceeds from concurrent securities offerings, which it also completed Wednesday, and with working capital.

Unlike the situation that Panhandle and Trunkline faced in the mid-1990s, which included declining throughput and difficult recontracting negotiations because of deregulation, the pipelines now find their capacity in high demand, Karam noted.

"We're getting the benefit of a lot of good things happening at once," he said. "The business profile of Trunkline is strengthening. The LDCs now have to shore up their capacity portfolios and lengthen their contracts because the deregulated marketplace that regulators helped to develop in the mid-90s never quite happened. Now you have those same state regulators going back to the LDCs saying, 'Hey guys, you had better make sure you have enough capacity and your contracts are strong.' Actually the business of Trunkline is strengthening in both length of contract and pricing of the capacity.

"The other thing is that we are coming out a severe winter so storage levels were roughly 50% of what they had been in prior years. That also adds to the good confluence of issues that will allow us to take advantage of a firming of capacity in the summer months and stronger shoulder months into next winter."

Trunkline also is in the enviable position of owning the largest liquefied natural gas (LNG) import terminal in the nation at a time when Federal Reserve Chairman Alan Greenspan is highlighting the growing importance of LNG in the continental gas market. Making Trunkline LNG even more attractive is its 20-year capacity agreement with British Gas.

Karam said he has "not yet had an opportunity to sit down and talk" with BG on its plan to build a pipeline of its own out of the Lake Charles LNG plant, essentially bypassing Trunkline's system. BG currently is holding an open season to test market interest in the proposed 1 Bcf/d pipeline, which would be designed as a new outlet for Lake Charles LNG to multiple proposed pipeline connections in Louisiana (see Daily GPI, May 22).

"I understand some of their issues but certainly we would be of the opinion that we would like to talk to them to see if we could resolve their issues. The LNG facility is a great facility and they have contracted for all 1.2 Bcf. The relationship Panhandle has with BG is a good one and it's getting better every day."

Karam said Southern Union has its eye on growth opportunities within its business development plan and capital budget and possibly through additional supply transactions. "We will certainly be a committed player in the pipeline business; we will reinvest in the business, and we will seek to take advantage of ways to grow both organically and by extension. First and foremost we have to make sure that we successfully integrate and complete this acquisition."

Wilkes-Barre, PA-based Southern Union now owns and operates more than 10,000 miles of interstate pipelines that transport natural gas from the Gulf of Mexico, South Texas and the Panhandle regions of Texas and Oklahoma to major U.S. markets in the Midwest and Great Lakes region. Through its local distribution companies, Southern Union also serves 1 million natural gas end users in Missouri, Pennsylvania, Massachusetts and Rhode Island.

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